London’s Reach Bolsters U.S. Specialty Lines

Insurers Catlin, Beazley, Amlin, Hiscox and Newcomer Torus Find Their Niche in U.S. Market

Find a need, then fill it,” is a hoary business principle, but making it work is often harder than it looks. However, a number of British insurers have taken it to heart and have built substantial profit centers around it. In June 2006, Insurance Journal first examined the growth of Lloyd’s insurers in the United States [See IJ Web site: ]. Three and a half years later their presence has grown, to the point that companies like Catlin, Beazley, Hiscox and Amlin now occupy a strategic niche in the United States.

Although all of them continue to do business through the Lloyd’s Syndicates they fund and manage, they are no longer uniquely “Lloyd’s” or even British companies. Catlin and Hiscox moved their corporate domiciles to Bermuda. These independent operations operate in both admitted and non-admitted U.S. markets, particularly in specialty lines.

Both Sue Langley, Lloyd’s current director of market operations and North America, and former Lloyd’s U.S. President Wendy Baker, stressed that, rather than being competition for Lloyd’s, the different types of operating platforms are complementary. “Business models, like those of Catlin and Hiscox, are either low volume — high value, or specialist niche [markets],” Langley said.

Lloyd’s insurers have kept abreast of changing times by altering the way business is done. “Small and medium [SME] business coverage is no longer cost effective through Lloyd’s,” Langley continued. “Our business model is strong and we concentrate on spreading the risks. Part of diversifying that business model is making SME coverage available outside of Lloyd’s.”

The U.S. market is Lloyd’s biggest market. “Around 45 percent of our premium income is derived from the U.S.,” said Richard Ward, Lloyd’s CEO. The U.S. offers “the right kind of business,” he continued, “and it’s not under priced.” Given current economic conditions, Ward expects a further hardening of the market, but not across all lines. As a result Lloyd’s, and the companies that do business outside of Lloyd’s, can be highly selective in the types of coverage they write.

Within Lloyd’s, the Franchise Board, headed by Rolf Tolle, examines each syndicate’s business plan. That plan must show that the syndicate can achieve an underwriting profit. That goal carries over to the business models of the insurers who write coverage outside of Lloyd’s. Consequently the $35 billion U.S. surplus lines market, with its vaunted “freedom of rate and form,” offers an almost irresistible opportunity for “Lloyd’s” insurers to expand there.

The combination of disciplined underwriting and financial stability works to Lloyd’s advantage in the current economic crisis. “Doing business at Lloyd’s is attractive for a number of reasons,” said Ward. “It’s a disciplined market with an ‘A+’ rating and strong financial security [backed up by the Central Fund]. It’s also a subscription market.”

A single Syndicate, managed by one insurance company, rarely assumes total responsibility for the complex risks they underwrite. Coverage is spread over many Syndicates in various percentages, according to their agreement with the lead underwriter. The practice may go back to the days of sail, when a lead underwriter laid off certain percentages of risk to other underwriters, but it still works well in the modern world. A Lloyd’s broker assumes that he’s not putting all of the insured’s eggs in one basket.

Some of the Players

From their first tentative forays at the beginning of the new millennium the insurers mentioned above have put down U.S. roots. Catlin, Beazley and Hiscox all have U.S. subsidiary companies that operate in both the admitted and the non-admitted market.

Amlin recently joined the FTSE (‘Footsie’) 100, the UK equivalent of the Dow Jones 500. It operates a substantial independent reinsurance business from Bermuda. In August, Amlin established a representative office in Chicago, which, “will work within the existing Lloyd’s infrastructure, utilizing the Lloyd’s license in Illinois to write admitted business which may not otherwise reach the London market.”

Hiscox moved its corporate domicile to Bermuda in 2006. It now operates through three main platforms. Hiscox Global Markets underwrites mainly internationally traded business in the London market, primarily large or complex risks. Hiscox UK and Europe provide specialist insurance for professionals and business customers, as well as high net worth individuals. Hiscox International oversees its offshore business in Bermuda, Guernsey and Hiscox USA. The U.S. business operates in both the admitted and non-admitted market. Its acquisition of American Live Stock Insurance Co. in 2007 significantly expanded its presence in the admitted market.

In December, Hiscox announced that it would be “expanding its U.S. business and refocusing its reinsurance portfolio to take full advantage of market opportunities in the U.S. The group’s terrorism, media and technology, small ticket directors and officers liability and equine teams are being strengthened with 10 key appointments.”

It also plans to “set up new lines in property, construction and inland marine insurance,” and will “enhance the service it currently provides to the Latin American kidnap and ransom market with a new team based in Miami.”

To handle the expected new business Hiscox said it would open new offices in Lexington, Boston, Kansas City (Missouri), Miami and Los Angeles by the end of 2009. It currently has offices in Armonk, Manhattan, Chicago, Geneva (Illinois) and San Francisco. As a consequence of the U.S. expansion, it is reducing the scale of its Bermuda operations.

Even the deepening financial crisis hasn’t totally dampened enthusiasm for the U.S. market. In July, First Reserve Corp., a private equity fund manager with a 25-year history of investing in the energy industry, established Torus Insurance with an initial capital of $720 million. Headed by Clive Tobin, the former chief executive of XL Insurance Operations, the Torus’s five-year plan calls for both admission to the Lloyd’s market, and a strong U.S. presence.

The latter is already far-advanced, as Torus recently acquired Praetorian, Hannover Re’s former U.S. specialty lines subsidiary, and hopes to begin writing business through it by the end of the month.

A Closer Look — Catlin

In addition to its UK, Lloyd’s and Bermuda platforms, Catlin has a well-established U.S. presence. In December 2006, it acquired Wellington Underwriting, and subsequently combined the U.S. operations of both companies.

It currently underwrites the following classes of business on an admitted and non-admitted basis: accident and health reinsurance; casualty (primary and excess); crisis management; equine and livestock; inland marine; marine reinsurance; medical malpractice; professional liability; and property reinsurance.

Coverage is underwritten on behalf of Catlin US by the Catlin Syndicate, Catlin UK, Catlin Specialty Insurance Co., a non-admitted carrier, and Catlin Insurance Co. Inc., an admitted insurer.

Despite the economic crisis, Paul Jardine, Catlin’s chief operating officer, remains optimistic. “We’re well diversified, and we balance the risks,” he said in an interview last month. He described the current situation as a “balancing act,” which requires companies to be very careful how they allocate their capital.

Catlin’s U.S. originated business had already increased by 16 percent for the first nine-months of 2008 with gross written premiums of $257 million. Jardine sees more opportunities for growth, but he stressed that you “have to take them when they arrive, and you need to diversify.” His goal is a mixture of both “volatile and non-volatile” business; i.e., for every catastrophe risk written, balance it with something less risky.

A Closer Look — Beazley Group

Although it remains firmly anchored in the UK, Beazley has also been very successful in the United States. “Around 55 percent of our premiums are U.S. sourced,” said William Pitt of the marketing department. The group offers a mixture of Lloyd’s and non-Lloyd’s coverage, reinsurance and specialty lines in both the admitted and non-admitted market.

In November 2005, Beazley finalized the purchase of Omaha Property and Casualty Insurance Co. (OPAC), a wholly owned subsidiary of Mutual of Omaha. The acquisition, which was finalized in 2006 and renamed Beazley Insurance Co. has given the company access to markets in all 50 states.

Rapid growth has followed. Locally underwritten U.S. premiums have grown from a modest $20 million or so in 2005 to over $250 million in 2008. Approximately $150 million of that was from the admitted market, where Beazley has qualified 14 products in 37 states. Its commercial property coverage is available in all 50 states.

Beazley writes marine coverage, reinsurance and property, but its specialty lines business offers a lesson in niche marketing, not only in the United States, but also across the group. “In professional indemnity, or errors and omissions [E&O] coverage we’re the biggest at Lloyd’s with about a quarter of the business,” said Pitt. “In management liability [directors and officers] we write about a third of all Lloyd’s coverage.

Those specialties are reflected in Beazley’s U.S. operations, where 62 percent of its business is in professional liability. “We insure 30 of the top 200 U.S. law firms, 17 of the largest 25 software service firms and four out of the top five management consulting companies,” said Pitt.

In addition to those specialties, Beazley also has a well-developed program for architects and engineers (A&E), which includes design firms. “We cover 30 out of the top 50,” Pitt said. “But we also cover a number of the smaller A&Es, around 7,500 of them; we added around 2,000 in 2008, and it’s become our fastest growing line of business.” The fact that Beazley covers both large and small firms is an advantage. “Representing the big end, helps build the small end,” said Pitt.

He described Beazley’s U.S. D&O lines as aimed primarily at smaller firms, the SME’s, that Langley described. The coverage is usually combined with employment practices liability coverage (EPLI). “But,” Pitt stressed in no uncertain terms, “we do not cover any financial institutions!”

Beazley also offers commercial property coverage and “high value” individual property coverage, most of which is written in its Florida office. Pitt indicated that in most cases coverage is underwritten either in the surplus lines market, where Beazley deals with a selected number of managing general agents or in the admitted market through independent agents.

As with its Lloyd’s business, Beazley takes care to diversify risks both geographically and by line of business. It’s also dedicated to giving “straight answers” as far as claims are concerned. “Professional liability claims are complex,” said Pitt. “Consequently we use both local claims advisors and our own experts in order to coordinate our defense strategy.” He also pointed out that developing a “risk management strategy” for the insured is “part of the coverage.”

The New Kid on the Block — Torus

Oil prices are falling; hurricanes are becoming more frequent and more powerful; investment capital is drying up. So, what do you do? Why, you start an insurance company that specializes in energy risks for $720 million. However, Torus (www.torusinsurance.com) is a serious company. Its capital provider, First Reserve, knows what it’s doing. It has been successfully involved in both Validus Holdings (Validus Re) and Lancashire Re.

“We have a five-year plan,” said Tobin, Torus’s CEO. “We want to be about 80 percent in insurance and 20 percent in reinsurance.” Tobin knows what he’s talking about. He headed XL’s insurance operations from 2004 until January 2008, handling a wide-ranging group of operations, notably as the president and CEO of Winterthur in 2002, where he successfully integrated the Swiss company into XL.

Asked why he left, Tobin said he had enjoyed his work at XL and seeing it grow. “I worked in Bermuda, Zurich, London and the U.S. I helped set up operations in India and Brazil.” However, he continued, “XL’s strategy now calls for expansion in the U.S. market, and I really felt that they needed local people; plus I wanted to stay in London.” XL’s loss is Torus’s gain. Few people in the industry have the wealth of experience Tobin’s accumulated in his career.

He laid out Torus’s future plans step-by-step. Although currently focused on energy, it has already acquired Newcastle Re and Praetorian. Using them as a base, it plans to expand its reinsurance operations, and move into professional lines, initially D&O coverage. “We also have plans to expand into commercial property and excess coverage,” said Tobin. “We want to be a lead umbrella coverage underwriter.” In addition to its London office and the headquarters in Bermuda, Torus has offices in Jersey City and Chicago, from which to expand in the U.S.

Tobin explained why creating a Lloyd’s Syndicate is important for an expanding company. It provides greater financial strength and gives the capability of operating both in and out of the Lloyd’s market. “We’re also seeing a trend,” said Tobin, “towards companies seeking more partners for their insurance.”

He explained that in the past big companies tended to rely on one or two carriers; however, this seems to be changing in favor of selecting a greater number of carriers for their coverage. “Basically they don’t want to place too much reliance on one company,” said Tobin. As Richard Ward also noted, Lloyd’s, as a subscription market, fits right in with that trend.

Torus is committed to accepting complex risks, not the least of which are found in the energy market it currently serves. Most of our business “involves technical underwriting and knowledge of the industry,” Tobin said, “but now is a good time to find the best technical talent.” He explained that in making its “risk selection, pricing is secondary.” Analysis of the risk comes first.

That could be said of the U.S. market in general. Even though the country is in the worst economic crisis since the 1930s, none of the people interviewed indicated that they plan to reduce their presence in the U.S. On the contrary, most see the current crisis as an opportunity to expand.

Topics Carriers USA Excess Surplus Underwriting Agribusiness Reinsurance Property London Lloyd's